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• Gold prices have remained stable lately, even as interest rates shot higher
• Central bank purchases have boosted demand, offsetting impact from rates
• Downside risks dominate for now, but longer-term outlook seems bright

Gold stable, despite 'bad news'

Gold continues to trade with impressive resilience. Even though conditions in financial markets have turned against the precious metal in recent months, gold prices have not absorbed much damage, defying the negative pressure exerted by soaring interest rates and an appreciating US dollar.

In normal times, gold and interest rates have a negative relationship. When rates rise and yields on government bonds race higher, gold becomes less attractive, as it pays no interest to hold. If investors can buy a US government bond that pays them a yield of 4.5% per year, like they can today, they are less likely to buy the non-yielding precious metal. That's what theory suggests, at least.

Similarly, a stronger US dollar is bad news for gold because the metal is mostly priced in US dollars. This means that when the dollar appreciates, it becomes more expensive for investors outside of the United States to buy gold, which inevitably dampens demand.

But these classic correlations have broken down lately. Yields on inflation-protected bonds went through the roof in September to reach their highest levels in almost 15 years and the dollar has staged a phenomenal recovery. Going purely by the historical relationships, this combination should have smashed gold down.

Yet, the yellow metal has remained relatively flat, and continues to trade 8% away from record highs. Therefore, some new element has come into play to change gold's trading dynamics.

Central bank demand

This new element has been the direct buying of gold by central banks in an effort to raise their reserves. Central bank gold purchases reached a new record in the first half of this year, a pattern that likely persisted in the third quarter, spearheaded by China.

Geopolitics lie behind this boom in central bank demand. The invasion of Ukraine resulted in the immediate freezing of Russia's reserves held abroad in dollars and euros - around half of the assets held by the Bank of Russia were frozen under Americans and European sanctions. That was the beginning of a paradigm shift for how central banks manage their reserves.

The People's Bank of China started loading up on gold to diversify the nation's reserves away from dollars and euros, concerned about suffering the same fate in case diplomatic relations with the West turn colder in the future. This diversification strategy has seen China consistently buy gold for ten consecutive months through August, in what could be a multi-year trend.

Sovereign purchases have fueled underlying demand for gold, almost establishing a floor under prices. When there are such massive buyer whales active in the market, which are not sensitive to prices because their motives are mostly political, it helps to prevent any massive selloffs. Hence the resilience of gold prices in the face of sky-high rates.

The central bank buying spree has also suppressed volatility. Gold options contracts have seen their implied volatility fall to pre-pandemic levels over the summer, which essentially means investors are not hedging as much for any massive movements in gold, expecting the boost in demand to translate into smoother trading conditions moving forward.

New record highs possible, but not imminent

In the near term, downside risks for gold will probably continue to dominate. The negative forces of rising real yields and a roaring US dollar could continue to dampen the appeal of the precious metal, keeping a lid on any rallies.

It is difficult to say exactly how much further the rally in the dollar and yields can go. The US economy is superior to its competitors at this stage from a growth perspective, the Fed has shifted to a stance of higher-for-longer interest rates, and the Treasury will continue to flood the markets with newly issued debt next quarter, maintaining the upward pressure on yields.

Therefore, it seems premature to call for a trend reversal in gold. Most likely, these factors will keep the precious metal under selling interest in the coming weeks. That said, any losses could also be relatively limited considering the purchases from central banks, so gold prices might only bleed lower in a slow manner.

Looking at the charts, the most crucial regions to watch on the downside are $1,900, and beyond that the August low near $1,885. If that zone is violated too, the spotlight would turn to $1,860, a level marked by the inside swing high in March.

In the bigger picture, though, it seems quite plausible that gold can eventually rally to new records. If the highest bond yields in a generation could only knock gold 8% down from record highs, the precious metal can likely take out those highs once yields cool off again.

For that to happen, it might require some panic event in global markets or signs of an imminent US recession that fuel speculation of Fed rate cuts. That's not on the horizon for now, but the economic cycle does seem to be in its final stages, so it might simply be a matter of time.

US Conference Board Consumer Confidence for September took a hit, dropping from previous reading of 108.7 to 103.0, falling short of the anticipated 105.9. While Present Situation Index noted a modest rise from 146.7 to 147.1, Expectations Index saw a more significant drop, moving from 83.3 down to 73.7. Notably, this decline brought the Expectations Index beneath 80 mark, a level that has been traditionally viewed as early warning of an impending recession within the following year.

Dana Peterson, Chief Economist at The Conference Board, remarked, "Consumer confidence fell again in September 2023, marking two consecutive months of decline."

The main driver behind September's lackluster headline figure was identified as the dip in the Expectations Index, even as the Present Situation Index saw negligible changes.

Peterson further elaborated on the underlying sentiments, saying, "Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates."

Full US consumer confidence release here.

Markets

It seemed at first that today was going to be a repeat of yesterday at the start of the European session, be it in less dramatic fashion. Both US and German yields eked out a few more basis points at first. But momentum dwindled after stock markets opened and in no time stacked losses of up to 1.3%. But unlike Monday, core bonds reversed course and began profiting from the risk aversion instead of causing it. Some end-of-quarter repositioning (closing post-Fed bond shorts) could be playing as well. US yields eased between 0.8-3.9 bps with the belly of the curve outperforming the wings. German rates shed 2.2-2.4 bps across the curve. We note that in both cases, yields cut losses in half after the US joined. Today’s main event on the economic calendar is still due after finishing this report with the US Conference Board consumer confidence for September. Several ECB speakers hit the wires but they were of little informative value. Lithuanian governing council member Simkus did repeat the need to discuss (ending) PEPP (reinvestments) “sooner rather than later”.

Dynamics on FX markets were similar to Monday too with a stronger dollar setting the tone initially before paring some gains later on. EUR/USD currently trades virtually unchanged at 1.0591 after having touched an intraday low of 1.057. DXY tentatively forfeits the 106 mark. USD/JPY also gives up earlier, be it minor gains to change hands around 148.89. Japan’s finance minister this morning stepped up verbal warnings, saying they are watching market moves with “high sense of urgency”. EUR/GBP for a third time straight attacked the 0.87 big figure but so far without a sustained break higher. The pair is filling bids in the high 0.86 area currently. Cable loses the 1.22 mark for the first time since March this year. The Hungarian forint in CE stands out against local peers, strengthening to EUR/HUF 388.17. The Hungarian central bank further reduced the O/N deposit tender rate by 100 bps to align it with the 13% base rate. The Monetary Council in this respect concluded the normalisation of the extraordinary interest rate environment. After today’s decision, the central bank’s set of monetary policy instruments will be changed and simplified. Even while implementing a technical simplification, the MNB indicated it is necessary to maintain tight monetary conditions in order to achieve price stability. Taking a cautious approach to changing the base rate is warranted in order to address fundamental inflation risks. With the acceleration of disinflation, the domestic real interest rate will move to positive territory in September and that process is expected gradually continue.

News & Views

According German IFO institute, expectations in the German export industry dropped considerable in September. The Ifo Export Expectations index fell to -11.3 points, down from -6.5 points in August. According to the head of Ifo surveys, Klaus Wholrabe Germany’s export economy is going through a weak phase as Exports to all key regions are currently in decline. At the present time, only manufacturers of leather goods and furniture, as well as a handful of food companies, are said to expect a rise in exports. All other sectors are predicting a drop in international business. The hopes for growth expressed last month in the chemical industry have evaporated. Automakers are now more skeptical as well. Printing companies are currently the most pessimistic. Ifo concludes that that export demand likely won’t pick up significantly until next year.

Inflation in Brazil in September reaccelerated at 0.35% M/M and 5% Y/Y up from 0.28% M/M and 4.24 Y/Y in August. The rebound in inflation was relatively broad-based as 6 out of nine subcategories showed higher monthly prices with transportation prices rising 2.02% M/M. The release of the September inflation data came on the same day the Central Bank of Brazil released the minutes of last week’s policy meeting when the Bank reduced its policy rate by 50 bps to 12.75%. According to the minutes board members saw it appropriate to continue the easing cycle at current gradual pace of 50 bps steps at current meeting. Only substantial positive surprises in the decline of long term inflation expectations or in the services price dynamics would allow for a faster pace of reductions. A survey of the central bank among market participants still saw inflation above the 3.0% target for 2024 and 2025 at respectively 3.86% and 3.5%. The real maintains recent most losses against the dollar with USD/BRL trading 4.97.

Daily Pivots: (S1) 1.2184; (P) 1.2221; (R1) 1.2247; More...

GBP/USD's decline is in progress and intraday bias stays on the downside. Fall from 1.3141 should target 1.2075 fibonacci level. On the upside, above 1.2306 minor resistance will turn intraday bias neutral and bring consolidations. But near term outlook will stay bearish as long as 1.2618 support turned resistance holds, in case of strong recovery.

In the bigger picture, fall from 1.3141 medium term top is seen as a correction to up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3141 at 1.2075. Strong support would be seen there to bring rebound on first attempt. However, sustained break of 1.2075 will raise the chance of bearish trend reversal and target 1.1801 structural support next.

Daily Pivots: (S1) 1.0616; (P) 1.0644; (R1) 1.0673; More...

Intraday bias in EUR/USD remains on the downside at this point. Sustained trading below 1.0609/34 cluster support will carry larger bearish implication, and target 1.0515 support next. On the upside, above 1.0672 minor resistance will turn intraday bias neutral and bring consolidations. But outlook will stay bearish as long as 1.0764 support turned resistance holds.

In the bigger picture, focus stays on 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609). Sustained trading below there would rase the chance of bearish trend reversal. That is, fall from 1.1274 could be reversing whole rise from 0.9534 (2022 low). But even if it's just a corrective move, deeper decline would be seen to 61.8% retracement at 1.0199. For now, risk will stay on the downside as long as 55 D EMA (now at 1.0825) holds, in case of rebound.

Daily Pivots: (S1) 0.9075; (P) 0.9106; (R1) 0.9151; More....

Intraday bias in USD/CHF remains on the upside for the moment. Decisive break of 0.9146/60 cluster resistance will carry larger bullish implication, and target 0.9439 resistance next. On the downside, break of 0.8930 support is needed to confirm short term topping. Otherwise, outlook will stay bullish in case of retreat.

In the bigger picture, rebound from 0.8551 medium term bottom is currently seen as a correction to the downtrend from 1.0146 (2022 high). Further rally would be seen to 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160). Strong resistance could be seen there to limit upside, at least on first attempt. However, decisive break of 0.9146/60 will indicate trend reversal, and target 61.8% retracement at 0.9537.

Daily Pivots: (S1) 148.43; (P) 148.70; (R1) 149.15; More...

Intraday bias in USD/JPY remains on the upside for the moment. Current rise from 127.20 is in progress to retest 151.93 high. On the downside, however, firm break of 147.31 support will should confirm short term topping, and turn bias to the downside for 145.88 support and below.

In the bigger picture, while rise from 127.20 is strong, it could still be seen as the second leg of the corrective pattern from 151.93 (2022 high). Rejection by 151.93, followed by break of 137.22 support will indicate that the third leg of the pattern has started. However, sustained break of 151.93 will confirm resumption of long term up trend.

Dollar, although retaining its strength, is witnessing mild deceleration in upside momentum as US session starts. The spotlight now shines on any potential progress within the US Congress to prevent a partial government shutdown looming this Sunday. While the notion of a shutdown isn't unfamiliar in the US, having occurred 14 times since 1981, this instance carries heightened significance. Moody's recent warning accentuates this, indicating that a shutdown now could underline how escalating political divides are deteriorating the nation's fiscal position.

Focusing on other currencies, Euro emerges as today's frontrunner, with the Yen and Dollar trailing closely. On the other end of the spectrum, Canadian Dollar appears to be the most underwhelming performer, with Sterling and Aussie not faring much better. Swiss Franc and Kiwi present a mixed picture for the time being.

Technically, EUR/GBP is having another take on 0.8700 structural resistance today. Decisive break there will strengthen the case that whole corrective fall from 0.9267 has completed with three waves down to 0.8491. That would turn near outlook bullish for further rise to 0.8874/8977 resistance zone. Any upside acceleration in EUR/GBP could help cushion Euro's decline against Dollar.

In Europe, at the time of writing, FTSE is up 0.21%. DAX is down -0.62%. CAC is down -0.66%. Germany 10-year yield is down -0.020 at 2.780. Earlier in Asia, Nikkei dropped -1.11%. Hong Kong HSI dropped -1.48%. China Shanghai SSE dropped -0.43%. Singapore Strait Times dropped -0.01%. Japan 10-year JGB yield rose 0.0150 to 0.746.

ECB's Muller expects steady interest rates for the time being

ECB Governing Council member Madis Muller said today he does not anticipate any further hikes in interest rates for the time being.

The significant question is on the duration for which borrowing costs might remain at heightened levels. Expounding on this, he mentioned, "will depend on how the euro-area economy develops over the year and how the slowing of inflation plays out."

Highlighting the current economic climate, Muller stated, "Right now, we see that the economic situation is relatively weak in the euro area as a whole."

He, however, expressed a cautious optimism about the region's economic future, noting the potential for modest improvements. "

Looking forward, it could start improving slightly. If the recovery is slower, then that means smaller pressures in terms of inflation," Muller added.

Japanese officials weigh in on Yen's slide as it approaches 149 against Dollar

This week's decline of Yen against Dollar, which seems poised to breach 149 mark, has brought remarks from Japanese officials into sharp focus. Market participants are keen to decipher indications of when Japan might transition from verbal caution to active intervention, even though it's clear that Japan wouldn't pre-announce such a move.

Finance Minister Shunichi Suzuki, reiterating his consistent position, stated today, "Foreign exchange rates should be determined by market forces, reflecting fundamentals."

Suzuki emphasized that "Excessive volatility is undesirable," and assured that the government is monitoring the currency fluctuations with a "high sense of urgency". "We will respond as appropriate to excessive volatility without ruling out any options," he added.

Echoing Suzuki's sentiments, the newly appointed Economy Minister, Yoshitaka Shindo, stressed the significance of stable currency movements that mirror economic realities.

Pointing out the multifaceted impact of the Yen's position, Shindo elaborated, "Weak Yen has various effects on economy such as raising import costs for consumers, improving competitiveness of exporters."

With these comments, the stage is set for a heightened scrutiny of Japan's potential interventions in the currency market. Market participants will no doubt remain vigilant to further remarks and actions by Japanese officials in the coming days.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 148.43; (P) 148.70; (R1) 149.15; More...

Intraday bias in USD/JPY remains on the upside for the moment. Current rise from 127.20 is in progress to retest 151.93 high. On the downside, however, firm break of 147.31 support will should confirm short term topping, and turn bias to the downside for 145.88 support and below.

In the bigger picture, while rise from 127.20 is strong, it could still be seen as the second leg of the corrective pattern from 151.93 (2022 high). Rejection by 151.93, followed by break of 137.22 support will indicate that the third leg of the pattern has started. However, sustained break of 151.93 will confirm resumption of long term up trend.

Economic Indicators Update

Hello fellow traders. In this technical article we’re going to take a look at the Elliott Wave charts charts of AUDUSD forex pair published in members area of the website. As our members know AUDUSD has recently made recovery against the 0.6520 peak that has unfolded as Elliott Wave Double Three Pattern. It made clear 7 swings from the lows and completed correction at the extreme zone . In further text we’re going to explain the Elliott Wave pattern and trading strategy

Before we take a look at the real market example, let’s explain Elliott Wave Double Three pattern.

Elliott Wave Double Three Pattern

Double three is the common pattern in the market , also known as 7 swing structure. It’s a reliable pattern which is giving us good trading entries with clearly defined invalidation levels.
The picture below presents what Elliott Wave Double Three pattern looks like. It has (W),(X),(Y) labeling and 3,3,3 inner structure, which means all of these 3 legs are corrective sequences. Each (W) and (Y) are made of 3 swings , they’re having A,B,C structure in lower degree, or alternatively they can have W,X,Y labeling.

AUDUSD 1 Hour Elliott Wave Analysis 09.20.2023

AUDUSD made 5 waves down from the 0.652 peak and now correcting that cycle. The pair is giving us (ii) blue recovery that is unfolding as Elliott Wave Double Three Pattern. Correction has wxy red inner labeling. The extreme zone has been already reached at 0.64718-0.64938. However, we expect to see another leg up to complete 7 swings. It’s important that correction ends below 0.65207 peak. We can see either decline toward new lows or larger 3 waves pull back at least. Invalidation for the current count would be break above 0.65207

AUDUSD 1 Hour Elliott Wave Analysis 09.20.2023

AUDUSD made proposed leg up and complete 7 swings structure. Previous high: 0.65207 held well during the correction. The pair found sellers at the extreme area and we got decline as expected. Current view suggests ((iv)) black recovery completed at 0.65101 high. As far as the price holds below that peak, further weakness should follow.

ECB Governing Council member Madis Muller said today he does not anticipate any further hikes in interest rates for the time being.

The significant question is on the duration for which borrowing costs might remain at heightened levels. Expounding on this, he mentioned, "will depend on how the euro-area economy develops over the year and how the slowing of inflation plays out."

Highlighting the current economic climate, Muller stated, "Right now, we see that the economic situation is relatively weak in the euro area as a whole."

He, however, expressed a cautious optimism about the region's economic future, noting the potential for modest improvements. "

Looking forward, it could start improving slightly. If the recovery is slower, then that means smaller pressures in terms of inflation," Muller added.